High-net-worth individuals turn to LLPs for tax optimisation

Limited Liability Partnerships offer a unique advantage to HNIs as they reduce tax burden, thus making it an attractive option for tax planning

- MONIKA YADAV

IN a bid to optimise their tax liabilities, high-net-worth individuals (HNWIS) are increasingly resorting to registering Limited Liability Partnerships (LLPs), according to experts. LLPs offer a unique advantage that enables HNIs to pay less in taxes, making it an attractive avenue for tax planning.

LLPs are subject to a tax rate of 34.94% on their total income, distinguishing them from other business structures. One key feature of LLPs is that the distribution of profits is exempt from tax, resulting in only a single layer of taxation. This factor plays a crucial role in reducing the tax burden for HNIS who choose to register their investments under an LLP.

To illustrate the potential benefits, Lokesh Shah, partner at IndusLaw, gives a hypothetical scenario. If an HNI were to invest in a company named X Ltd and receive dividends from that investment within a specific financial year, the dividend income would normally be subject to a tax rate of 42.74% (39% under the new tax regime) for individuals in the highest tax bracket. However, if the HNI holds shares in X Ltd through an LLP, the effective tax rate on dividends received from X Ltd would be 34.94%.

The utilisation of LLPs has emerged as a compelling option due to the favourable tax treatment they offer. Experts highlight that engaging in such tax planning measures is within the legal boundaries established by the authorities.